SOUTH AFRICA: DEBEERS CONTEMPLATES THE U.S. MARKET

1. (C) Summary: On July 28, Econoff and EconFSN sat down to
an hour-long conversation with Jonathan Oppenheimer, Director
of E. Oppenheimer and Sons and Managing Director of De Beers
Consolidated Mines, Ltd., to review the landscape for De
Beers in the wake of its July 13 settlement with the U.S.
Department of Justice on a 1994 price fixing charge. In line
with the company's commitment "to be legally compliant
throughout the world," De Beers pled guilty to having fixed
industrial diamond prices and agreed to pay a fine of USD 10
million. The settlement means that De Beers executives can
freely travel to the United States and expand the company's
business in the world's most lucrative consumer market.
Oppenheimer talked about how De Beers had already started to
leverage its well-known name in international retail markets.
However, the pace of entry into the United States retail
market would be determined by the company's ability to
"extinguish its liabilities" stemming from U.S. civil law
suits (now three in number). Oppenheimer lobbied for U.S.
support of a scheme using "smart cards" to register the
activities of small-scale diamond miners and traders in
Africa under what he termed "Kimberley Process II." End
Summary.

Next in Line


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2. (SBU) At 34 years old, Jonathan Oppenheimer is the
youngest heir to Ernest Oppenheimer's original fortune made
from the mining and sale of South African rough diamonds and
gold. Over the past several years, Jonathan Oppenheimer has
assumed a higher political profile in De Beers, particularly
with respect to South African mining legislation and company
operations in Africa. As Managing Director of Consolidated
Mines, Ltd., he is responsible for South African operations.
As a Director of E. Oppenheimer and Sons, he is also
responsible for African producer relations. Jonathan's
father, Nikki, succeeded Jonathan's grandfather, Harry, as
Chairman of De Beers in 1998. Jonathan now works along side
Nikki in the Johannesburg offices of E. Oppenheimer and Sons.
The Oppenhiemer family owns 45 percent of De Beers outright,
and controls another 5 percent or so through direct and
indirect shareholdings in Anglo American (which owns 45
percent of De Beers) and Debswana, a 50/50 joint venture
between De Beers and the Government of Botswana. Though
young, Jonathan Oppenheimer occupies a privileged position
from which to represent De Beers' interests.

De Beers Still the Dominant Force


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3. (SBU) Despite growing competition, De Beers is still the
dominant force in diamond mining and marketing in the world
today. In 2003, the De Beers Group mined 43.9 million
carats, or about 31 percent of world production, mostly from
Botswana (30 million carats) and South Africa (11.9 million
carats), but also from Namibia (1.5 million carats) and
Tanzania. In a race with a growing number of diamond mining
companies, De Beers is actively exploring in Canada, Russia,
Brazil, India, and participating in early stage joint
ventures in Australia and several other African countries.



4. (C) De Beers' Diamond Trading Company (DTC), successor to
the Central Selling Organization (CSO), still controls about
two-thirds of the rough diamond market. Most supply is
guaranteed by De Beers Group mines (41 percent by value).
The rest comes from direct purchases, especially from Alrosa,
Russia's diamond mining company. In 2003, the DTC logged a
record USD 5.5 billion in sales, partly because of higher
diamond prices and the decision to sell off excess inventory.
In addition, the DTC has embarked on a marketing strategy to
generate consumer demand for diamonds, which De Beers feels
lags behind other luxury goods. Increased demand, lower DTC
inventory levels, fewer purchases from Alrosa, and equipment
failures reducing production at De Beers Group mines in
Botswana lead some analysts to believe that the industry may
be heading toward a supply crunch and higher prices in the
near future. Oppenheimer said that De Beers was concerned
that the level prices stay relatively stable to encourage
consumer demand, and to discourage accusations that once
again De Beers may be manipulating the market.
Kimberley Process II


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5. (C) Oppenheimer took the opportunity of this meeting with
U.S. officials to lobby for De Beers' idea of using smart
cards and reading devices to register small-scale miners and
traders in Africa who currently fall outside the Kimberley
Process Certification Scheme. Oppenheimer believes that the
system could connect miners to national ministries, help
track regional diamond trade, and even provide a vehicle for
payment. He estimated that some USD 700 million in
small-scale diamond production were falling outside the
Kimberley Process, but believed that most of this was the
result of legitimate small scale mining. Oppenheimer thought
that smart cards could form the basis of a "Kimberley II."
Kimberley certification would mean that De Beers could enter
these local rough diamond markets and pay up to six times
more than local traders were paying the small-scale miners
now. De Beers wanted to garner U.S. and other Kimberley
Process country support to push this idea toward a U.N.
Security Council resolution.



6. (C) Ever wary of competition and the possibility of
unsavory characters tarnishing the diamond trade, Jonathan
Oppenheimer took the opportunity of the meeting to raise
ethical questions about the Lev Leviev Group, De Beers'
Namibian competitor. He went out of his way to say that De
Beers was concerned about Leviev's shady past as an Israeli
arms dealer, but admitted that De Beers had no hard evidence
of his trade in conflict diamonds or use of diamonds as a
means to launder money.

Marketing


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7. (C) Oppenheimer spoke about the shift in De Beers'
strategy from one that controlled the supply (and price) of
diamonds to one that focused on demand. Under its "Supplier
of Choice" initiative, De Beers was joining with leading
diamantaires (DTC sightholders) to stimulate consumer demand.
Research showed that consumer demand for diamond jewelry
consistently trailed other luxury goods. De Beers wanted to
change this by advertising more and branding diamonds to tap
into the different segments of the retail market. Central to
this approach was "leveraging" the De Beers name with
consumers and accessing the U.S. market, which accounted for
50 percent of the world's retail market for diamonds.



8. (C) Oppenheimer said that market research had revealed
that consumers viewed the name "De Beers" as being synonymous
with quality diamonds, even though De Beers did not even
participate in the retail market. To capitalize on this
phenomenon, De Beers had decided to leap frog the cutting and
polishing industry and move directly into retail, where the
markups were especially high. In fact, De Beers had already
joined with experienced retailer Louis Vuitton Moet Hennessy
(LVMH) to open high end diamond jewelry stores in London and
Tokyo. Under an agreement with the EU's Competition
Commission, De Beers promised to not source diamonds solely
from itself to supply its retail outlets. Oppenheimer
thought that about 20 percent would likely come from non-DTC
sources. Oppenheimer confirmed that De Beers/LVMH planned to
open a store in New York City, but said that De Beers was in
"no rush" to enter the U.S. market. Referring to three civil
law suits pending U.S. courts (involving potential commercial
damages from past CSO selling practices), Oppenheimer said
that De Beers intended to "extinguish its liabilities" before
moving rapidly into the U.S. retail market.

South Africa Mining Legislation


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9. (C) Oppenheimer decried recent confusion in South Africa
over Black Economic Empowerment (BEE) ownership requirements
for mining and exploration licenses on state owned land.
Despite the government's clarification that its 51 percent
BEE ownership requirement would be limited in duration, it
was entirely unclear to him as to how the requirement would
revert after one year to the 26 percent set forth in the
mining industry's BEE charter. He further commented that
applying BEE ownership requirements to exploration was
especially problematic, since there were no black owned
companies operating in this area and few black investors with
deep pockets to fund exploration. Oppenheimer also decried
the deleterious effect that the debate over mining royalty
levels was having on the South African investment climate for
mining. No matter the level, he thought that the government
would be advised to resolve the issue soon, as the
uncertainty was freezing many investment decisions.
FRAZER